How To Manage Your Small Business Cash Flow Effectively

by Vilobh Thorat · Published October 25, 2022 · Updated September 9, 2023

Thinking about starting a small business or have you just started it? Then, it’s very natural that the only thing on your mind right now is “profits”. Right? If true, please stop and read the following. Why? The reason is simple. You may have already come across someone in your vicinity or relation or heard of someone who started a small business and initially made a good profit.

And then, all of a sudden, the business just shut down. The entity just went out of the market. Why did it happen? The answer most probably is improper cash flow management.

In fact, as per a study by Jessie Hagen of US Bank, 82% of small businesses fail due to lack of proper cash flow management.

Table of Contents

What is Cash Flow?

Cash flow in a business, simply put, is the amount of cash that comes in and the amount of cash that goes out in a particular period. Cash coming in is basically the earnings from the sales of products and services(Inflow).

Cash going out is the expenditure to run the business entity. It consists of working capital and debt payments(outflow).

Based on the above, cash flow can be classified as follows :

1. Positive cash flow

When more cash is coming into your business than it goes out, at a particular period,
It’s called positive cash flow.

2. Negative cash flow

when more cash is going out of your business than it comes in, at a particular period, it’s called negative cash flow.

Importance of Cash Flow for Small Businesses

Cash flow is crucial for small businesses. As the famous Richard Branson has said “Never take your eyes off the cash flow because it’s the life blood of business.” The capacity of a small business to generate positive cash flows determines its management success.

Good cash flow management makes your business resilient in the long run. The ideal scenario of basic financial management for a small business is to have a positive cash flow, which enables it to have cash In hand at any given time. Additionally, it offers the owner the freedom to handle any emergency situations that may arise.

If the cash flow is negative, there definitely comes a time, when one can get into a cash crunch. Because one will always have payments to be made in order to run the Business, no matter what, like paying laborers their salary, payment for raw materials, debts etc. In such cases, one may be forced to take more loans.

Then, without realizing it, one is trapped in a debt cycle coming out of which is extremely difficult. That is precisely how profit-making entities suddenly run out of business.

So, if you want your business to sustain itself in the longer run, effective cash flow management becomes extremely crucial.

How to Manage Your Small Business Cash Flow Effectively?

Here are a few tips for small business cash flow management.

1. Monitor cash flow

This one is obvious. But many miss this. proper monitoring of cash flow. On a regular basis will give you an understanding of how smooth is the movement of cash and also identify bottleneck areas and make necessary corrections.

2. Be wise when spending

Instead of buying things, which call for more investments, try leasing. This will directly let you have more cash in hand. By leasing vehicles, computers and other business equipment, you also get access to the latest features and avoid tying up cash.

3. Cost cutting

Once you start monitoring your cash flow, you get a grasp of weekly, monthly, quarterly and annually recurring costs. Identify areas where you can make cuts. Can you cut back on utilities, rent or payroll? Are you spending money on services you’re not using frequently? Identify ways you can renegotiate the terms of outstanding loans or leases.

4. Cash in on dead investments

Any equipment you no longer use or any inventory that is obsolete can be sold to generate quick cash.

5. Immediate invoicing

Send invoices when the work’s completed or products are delivered. Make Invoices easy to understand and always mention important aspects like due date, the amount due, where to send payment and payment methods.

6. Ask for deposits

While delivering a large order, never forget to ask for deposits.

7. Partial payments

Again, while delivering large orders, make an agreement for partial payments. You can identify intermediate milestones, and ask for payments accordingly.

8. Offer deals for early payments

This will make your customers happy to pay you asap while you don’t have to keep following up. This will also save you time to focus on other Activities. Most businesses spend heavy time just on payment follow-up activities.

9. Delay your own payments

This may sound a bit shrewd but is equally important. Delay making payments unless it’s absolutely essential. This is also a way of keeping cash in your pocket instead of your vendor’s.

10. Make deals with transporters

If you use a regular transport service to deliver your goods, make contracts. To make payments on a pre-defined period, instead of paying for each trip. This also keeps your transporters on their toes and pushes them to work effectively.

11. Identify business risks & prepare in advance

This is one of the most important aspects of running any business entity. No matter how well you plan, there will be a time when a serious challenge will arise. So it’s always better to make a risk assessment and be prepared for it.

What if an order is suddenly cancelled when you have made the required purchase?
What if the order quantity increases at the last minute?
What if someone who owes you money goes missing or has made a huge loss and can’t
Make your payments?

These are some of the questions you need to ask yourself and try to be prepared for them.

Always remember, Profits are meaningless if they are only on paper, and there is no cash in the pocket. So proper cash flow management is extremely crucial for managing a small business.

As they say in business, “Cash is King” and the king has to be on your side.